Macquarie Bank has become the first Australian bank to pull out of the global Net Zero Banking Alliance. (AAP: Dan Himbrechts)
In the wake of Donald Trump's election, Macquarie Bank has become the first Australian bank to pull out of a global initiative supporting banks to reach net zero, but the reasons are more complicated than a straight rejection of climate action.
Macquarie's decision came after America's biggest banks withdrew from the Net Zero Banking Alliance (NZBA) ahead of Trump's inauguration as US president. A number of Canadian banks also followed suit.
In recent years, Republican politicians have been on a warpath against companies that factor climate change into their business decisions and future plans, in what they described as "woke" green capitalism.
On face value, these exits are a significant blow to the world's efforts to reduce carbon pollution and cut fossil fuels.
But there is more to Macquarie's exit than meets the eye.
With record amounts of money flowing into the energy transition and the costs of climate change mounting, banks are increasingly caught between short-term fossil fuel profits, and a strategy that avoids long-term exposure to climate risks and cashes in on the renewables boom.
Net zero under attack
The NZBA was established in 2021 around the time of the Glasgow climate conference among a number of net-zero alliances in the finance industry.
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The aim of these alliances was to help their members transition their investments in line with the Paris Agreement.
Under the NZBA, members had to set targets for how they would bring down emissions in their lending and investment portfolios; however, the targets weren't binding.
Melbourne Law School's Rebekkah Markey-Towler researches the intersection of financial and climate change regulation.
She described net zero goals as an important "north star" for financial organisations, but said it also made business sense to start aligning their long-term decisions with the Paris Agreement.
"Longer term that is where the money is going to be made, in terms of financing how we're going to be dealing with climate change, so it is an opportunity for them,"
she said.
Net zero goals are just one branch of Enviromental, Social and Governance policies, known as ESG. These consider factors like climate change, diversity, or slavery in a company's decisions and investments.
The business world's ESG movement sparked a culture war against "woke capitalism", mostly in the US, but with its impact rippling beyond.
Opponents of these net zero alliances claimed that the policies "boycotting" fossil fuels worked against the principles of a free market and were tantamount to cartel behaviour.
A multi-billion-dollar backlash to net zero followed.
Some US states have banned their entities from investing in firms considered hostile to fossil fuels, and Texas pulled $US8.5 billion ($13.7 million) from the world's largest asset manager, Blackrock.
And last year, 11 states sued the world's biggest three asset managers under anti-trust laws.
Climate alliances started to collapse under the political and legal attacks.
The Net Zero Banking Alliance was formed around the time COP 26 was held in Glasgow in 2021. (Supplied: UNFCCC)
A few years after the net zero fanfare at Glasgow, the sustained attacks against the financial world's climate shift have hit hard. The net zero alliances covering asset managers, insurers and now banks have all lost members and some have folded, promising to reform and return.
Ahead of Trump's January inauguration, Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo all withdrew from the NZBA.
Big US banks knew where the wind was blowing and left the banking alliance. (Chris Hondros: AFP)
Announcing its exit last month, Macquarie said the principles of its net zero strategy "continue to guide activity as our climate strategy evolves to meet the needs of our clients and the requirements of governments and regulators, which differ across markets."
"The Net Zero Banking Alliance (NZBA) helped develop global frameworks and assisted member banks as they established their initial decarbonisation plans. With those building blocks now in place, like many peers, Macquarie will no longer be a member of NZBA," its statement read.
How useful were these alliances?
Criticism of these climate alliances has come from both sides.
For the climate community, its biggest criticism has been if they actually result in any reduction in fossil fuel investments or if they are just a veneer of climate concern covering business-as-usual.
Jacco Minnaar, an executive at European ethical bank Triodos, took aim at the net zero alliance for allowing member banks to invest in fossil fuels, which drive climate change.
Ethical banking executive Jacco Minnaar criticised the Net Zero Banking Alliance for allowing members to continue investing in fossil fuels. (Supplied: Triodos Investment Management)
JP Morgan Chase had been a member of the Net Zero Banking Alliance when it invested $US40.8 billion in 2023 into fossil fuels.
Similarly, Macquarie Bank had still been investing in companies with oil and gas expansion plans while it was an NZBA member, according to research from energy analyst think tank IEEFA.
"In financing practice, there is hardly any difference between banks that are members of a climate alliance and those that are not," Minnaar wrote.
His response also highlights how different climate sentiments are in the US compared to Europe, where the green transition is widely accepted and supported in the finance world.
A hall pass for fossil fuels?
Donald Trump's return to the White House hasn't just raised the spectre of a net-zero witch hunt, it's also potentially changed the direction of the US economy.
Ultimately, banks have an obligation to follow the trends of the market and make money for their shareholders.
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At the time of the Glasgow climate conference, green investments were the rage, says Gordon Noble, a research director with the Institute for Sustainable Futures at the University of Technology Sydney (UTS) who focuses on sustainable finance.
"When there were commitments being made around net zero … there was a lot of economic opportunity to do so. In the US, there was the Inflation Reduction Act, there was big money being thrown at effectively incentivising investment into green technology and renewable energy," he explained.
Now, Trump's "drill baby drill" mantra is more than just a slogan; he has also signed executive orders to boost the fossil fuel industry.
It's not just Trump with his fingers on the scales. Vladamir Putin's invasion of Ukraine caused global coal and gas prices to skyrocket, leading to short-term profits in fossil fuels and putting financial institutions at odds with their green horizons.
Russia has already reduced gas supply to Europe, and it's pushing prices up. (Reuters: Denis Sinyakov, file photo)
"If your country was heading towards net zero and it's now heading towards drill, baby, drill, if you're a financial institution, your paramount duty is to your shareholders. That's the way the corporation is set up, you are responsible to your shareholders to make a financial profit," Melbourne Law School's Markey-Towler said of the US.
"That's the direction that money is travelling at the moment. It's very short term, isn't it?"
That's what ESG initiatives were meant to factor in, according to UTS's Gordon Noble, especially for long-term investors like superannuation funds.
"The whole argument around ESG from a financial materiality perspective is that issues like climate change are going to play out in your portfolio," he said.
"You might get a short-term play on fossil fuels and benefit, but in the long term, you're going to be exposed to potentially what we call stranded assets, a carbon collapse of values in assets."
For example, an investment in a fossil fuel project scheduled to operate for 30 years might close early and at a loss.
Short term, banks believe money is to be made in fossil fuels. (ABC News)
Caught in this theoretical long- or short-term play of the financial world are the world's trillions of dollars and the destructive heating of the planet.
What does this mean for Australia?
To bring it back home, the reality in Australia is very different.
Being part of a net-zero group does not breach competition laws, as Australia's watchdog made clear in its new guidelines for financial institutions on sustainability and climate action.
Instead there is a lot of scrutiny on greenwashing. ASIC, the country's financial agency, has been acting on greenwashing incidents as part of its role to regulate misleading and deceptive conduct in the financial industry.
Australia's corporate world is also entering a new era with climate disclosure laws that kick off in the new financial year.
Why does this matter? Well, large businesses and corporations will now have to report on what climate action they're taking, what climate goals they have, if any, as well as their emissions and risks relating to climate.
Anna Skarbek, CEO of Climateworks Centre, says climate transition plans are becoming standard practice in business. (Supplied: Climateworks Centre)
Anna Skarbek, CEO of the Climateworks Centre, an independent not-for-profit within Monash University, says this reporting is in line with international standards.
"Climate transition plans are becoming a standard part of business and investment.
"Nearly half of the world's privately managed money has pledged to align with the science-based net zero goals in the Paris Agreement,"
she said.
"Ambitions for this remain strong. We have the tools we need to solve this, now it is just a matter of how fast we can get there."
UTS's Gordon Noble believes these new reporting standards will bring a new era of transparency around what corporations are actually doing on climate change.
"The challenge will be for those organisations that wish to have their cake and eat it. They wish to have renewable energy investments; they acknowledge that climate change is serious, but also they're going to finance fossil fuels," he said.
"This world of transparency is going to really expose that."
Facing our climate future
Despite the instability, investments in clean technology in 2024 were expected to set a new record and double that of fossil fuels. At the same time, banks are increasingly exposed to the impact of hotter temperatures and more extreme weather on their portfolios.
It's too early to say whether the retreat of America's wealthiest banks, and one of Australia's, will result in a new gold rush for fossil fuels, or if it's a discreet attempt to avoid the net-zero backlash.
As ethical banking executive Jacco Minnaar writes, "This is not the time to lose hope."
"Their departure is distressing because it reduces our scope for action, but it also provides an opportunity for a strong 'coalition of the willing' to take the NZBA forward and show what climate action really looks like."